A 'continuing problem': State takes action against unlicensed payday lenders

Action is being taken against five payday lenders for giving loans to Minnesotans despite not having a license to operate in the state.

The Minnesota Department of Commerce issued a cease-and-desist order to Tennessee-based LoanByPhone.com because it lent money to a resident without having approval to do business in Minnesota.

It follows similar action being taken against unlicensed Internet payday lenders Omega Investments; Sanguine, Inc.; Ameriloan; and Pack Management Group, the department said in a news release.

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"Unlicensed lenders are a continuing problem as they prey on consumers who may be in difficult financial straits and turn to payday loan websites to get fast cash," Minnesota Commerce Commissioner Mike Rothman said.

Rothman points out that using unlicensed lenders can open up consumers to possible identity theft, automatic loan extensions, harassment from debt collectors, and unauthorized bank account withdrawals.

But consumers who do take a loan from a lender unlicensed in Minnesota are under no obligation to pay it back, with the loan considered void under state law.

Those planning on taking out a payday loan can get in contact with the DOC here to check whether the lender they plan to use is licensed or not.

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Costs can quickly spiral with 'rollover'

Payday loans are designed to be a short-term stop-gap for people short of cash as they approach their next paycheck, but have a notorious reputation for charging interest rates that can be in the thousands of percent.

In Minnesota the amount lenders can charge in interest is capped depending on how much you borrow – ranging from a maximum fee of $5.50 for borrowing under $50, to a 33 percent annual interest rate plus a $25 fee on loans between $350 and $1,000.

But these costs can spiral given that customers who are unable to pay off their loans on time are allowed to "rollover" their loans – taking out another payday loan to cover their repayments – which effectively compounds the interest and causes repayments to spiral.

Plans for stricter regulation disappear

Last year, Minnesota came close to enacting several more restrictions on payday lenders, but despite the urging of Gov. Mark Dayton to get a bill ready for signing, the session ended before common ground could be reached.

And the bill hasn't reappeared in the 2015 session, with the Star Tribune's Neal St. Anthony saying it "slipped off the radar," and has not been brought up by the Republican-led House. (It was passed last year while in Democratic hands.)

In spite of this, Rothman told the newspaper he is still committed to pushing through tighter controls on the payday loan industry in the state.

The proposal being worked on at the end of last year's session would have limited borrowers to 10 payday loans a year, and required lenders to check whether their customers are overextended. It would also have required lenders to cap the annual percentage rate (APR) for loans given to military members at 36 percent.